Has politics gleefully trumped the reform push?

The government may have gone on a reform overdrive, but the biggest disappointment undoubtedly has been on the much-awaited GST Bill. The government said there would be no short session on GST, and the key reform that would have boosted investor sentiment, is unlikely to meet its April 2016 deadline. So has politics successfully trumped the reform push? Bloomberg TV India caught up with Anubhuti Sahay, Economist, Standard Chartered Bank to sense the sentiment of foreign investors.

What do you make of GST being derailed at this stage? If you hear the commentary coming in from the Congress, the protests are bound to get louder in most reform processes going ahead. Are you worried about the growth?

Not really if you talk about the probability of the GST Bill implemented from April 1, 2016. To a great extent, the market had priced in GST, and is likely to get delayed. This news will have a negative impact because all hopes would be dashed now. But we don’t think it comes out of the blue. As far as impact on growth is concerned, I think at this particular moment, at least in FY16, the push on growth is coming from government’s spending on investment. And we think that should continue for this fiscal year, unless the government faces more and more increasing pressure to meet higher recurrent expenditures.

China has really contributed to the risks and volatility that we have seen. The Chinese are indicating the worst is behind them, reflecting the PBOC Governor’s comments that there is no more devaluation of Yuan. Isn’t that comforting?

That’s true. But if you actually recap the growth forecast for India this year we are looking at 7.3 per cent GDP growth. There will be no further devaluations in Chinese Yuan. We have taken a view based on the PBOC statement after the first Yuan devaluation happened. This was one of the moves. While we will see gradual depreciation in Yuan over the next few months, yet another big move on Yuan looks very unlikely to us. So that gives us more comfort on the external front. And that’s the reason why we expect the growth recovery to stay pretty much in line with what has been observed in the past. In fact we can see some benefits from lower commodity prices going forward.

The currency is down a whopping 4.5 per cent in the last one month. The forex reserves indications show that the RBI has been trying to curb the volatility. As Brazil faced a rating downgrade on Thursday morning, how do you think India is positioned?

We need to keep in mind that India or say Indian Rupee, which was extremely vulnerable in 2013 is not in the similar basket in 2015. If we talk about the macro vulnerabilities like current account deficit, inflation, fiscal deficit or for that matter even growth prospects, they are far better at this particular moment. And that to a great extent would define some stand in line for the Indian Rupee.

Having said that in the near term in case if there is a global risk aversion or there is some risk aversion on the back of expectations surrounding the first Fed rate hike, if there are more jitters around the Chinese economy, Indian Rupee will face pressure. So in the near term we do see weakening pressure on the Indian Rupee to continue.

But as the markets come down, which we think, will be the case in the last quarter of 2015, we would expect the Indian Rupee to erase some of the recent losses. In fact for December 2015 our view for Rupee is 65. Our sense is RBI monitors the REER very closely and while it was at a high of 114 which effectively imply that RBI could have been more tolerant towards weaker Rupee.

In recent days we saw REER trending close between 109 and 110. So that gives us more comfort that any further weakness on Rupee looks unlikely. If there is a global risk aversion, yes that would be allowed, currency would be allowed to move in tandem with the global developments. But once there is more stability in the global markets we should see Rupee stabilising at much more stronger levels. And as far as our view is concerned, we are looking at 65 by December 2015.

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